4. Presented by
• Ahsan Naeem
• Aneeka Imtiaz
• Hafiz Ali Hussain Sajid
• Abdul Mannan
• Aadil Naveed
• INTRODUCTION
• BUFFET’S WAY
• HOW HE DOES IT ?
• LECTURE’S REVIEW
• CASE STUDY
5. Warren Buffet
Warren buffet, The oracle of Omaha.
Warren is the third richest person
in the world. He is estimated to be worth
52 billion dollars. He has signed four fifths
of his fortune to the bill and Malinda Gates
foundation. Although he is rich Warren is
famous for his modest lifestyle, he still lives
in his home in Idaho which he purchased
for 38,000$ in 1958.
6. WARREN BUFFETT
Full Name: Warren Edward Buffett
Born : August 30, 1930 (age 83)in Omaha U.S.
Nationality : American
Occupation : Chairman & CEO of Berkshire Hathaway Inc.
Spouse : Susan Buffett(1952-2004)
Salary: US$100,000
Net worth : US$53.5 billion (March 2013)
Children : Susan Alice Buffett
Howard graham Buffett
Peter Andrew Buffett
7. BERKSHIRE HATHAWAY INC.
The 8th largest public company in the world.
Market capital is $186.05 billion
Averaged an annual growth in book value of
20.3%
Share price $ 113,700.00 per share
Stock produced a total return of 76%
63 subsidiaries
8. It is an American multinational conglomerate
holding company
Founded by Oliver Chase in 1839.
Employees : 260,519
Headquartered in Omaha, Nebraska, America
It oversees and manage a number of subsidiary
companies, and owns or has a stake in over 70
business such as Coca Cola, IBM, American Express
etc.
BERKSHIRE HATHAWAY INC.
9. EARLY LIFE
Ever since he was a child, Buffet displayed an interest in
making and saving Money
Did many petty jobs like went door to door selling
chewing gum, Coca-Cola, Newspaper or weekly
magazines etc
From that money he and his friend purchased pin-ball
machine @ 25 $ and placed in the local barber shop at
the age of 15
Filing his first income tax return in 1944, Buffett took a
$35 deduction for the use of his bicycle and watch on his
paper route.
Later took control of a textile manufacturing firm,
Berkshire Hathaway
10. He bought first stock at the age of 11 and now
he regrets that he started too late
By the time he finished college he had
accumulated more than $ 90000 in savings
He received M.S. in Economics from Columbia
business school in 1951.
His Role-models:
Benjamin Graham(1894-1976)
Phil Fisher(1907-2004)
11. BUFFETT’S EDUCATION
At the age of nineteen; He Graduated with a
Bachelor of Science in Business Administration
from University of Nebraska-Lincoln.
He earned a Master of science in Economics in
1951 from Columbia Business School.
He also attended the New York Institute of
finance
12. ORACLE OF OMAHA
Oracle (/ˈɒrək(ə)l/)
a priest acting as a medium through whom
advice or prophecy was sought from the
gods in ancient times
Omaha
Omaha is the largest city in the state of
Nebraska, United States
14. He still lives in the
same small 3
bedroom house in
mid-town Omaha ,
which he bought
after he got
married 50 years
ago. He says that
he has everything
he needs…..
15. His company,
Berkshire Hathaway,
owns 63 companies.
He writes only one
letter each year to
the CEOs of these
companies, giving
them goals for the
year. He never holds
meetings or calls
them on a regular
basis.
Assign right work to right people
16. He drives his
own car
everywhere and
does not have a
driver or security
people around
him.
17. He never travels by
private jet, although
he owns the world's
largest private jet
company.
18. He does not
socialize with
the high society
crowd. His past
time after he
gets home is to
make himself
some pop corn
and watch
television.
19. His advice to young people: Stay away
from credit cards
Avoid bank loans and invest in
yourself.
20. Buffet as philanthropist
He is not only a good investor but
also a patron.
Buffett once commented, "I want to
give my kids just enough so that
they would feel that they could do
anything, but not so much that they
would feel like doing nothing".
June 2006, he announced a plan to
give away his fortune to charity,
with 83% of it going to the Bill and
Melinda gates foundation .
Recently he talked about tax system
in their country .
21. A textile mill purchased in
1962 , Suffering from a
$2.2m loss at time of
purchase. Priced at
$8/share
though it had
$16.50/share of working
capital. Buffett currently
holds 38% of shares,
valued at total of $36bn.
24. PROFESSIONAL/BUSINESS CAREER
Warren Buffet was employed from 1951-54 at buffett-
falk & Co., as an investment salesman.
Worked as a Security Analyst at Graham-Newman
Corp. From 1954-1956,
From 1956-1969 at Buffet Partnership Ltd, as a General
Partner,
From 1970 Present as Berkshire Hathaway Inc, as its
Chairman, CEO.
25. FEW MAJOR STAKES
Comdisco Holdings Co
Inc.
38.18%
Washington Post Co. 22.38%
USG Group 16.21%
American Express 13.05%
Moody’ Crop 12.8%
Coca Cola Co. 6.85%
Kraft Foods Inc. 5.08%
28. Warren Buffet- The Sage of OMAHA
•Warren Buffet was one of the most
successful investors of this world.
•Noted for his adherence to valve investing.
•Born in 1930
29. Warren Buffet- The Sage of OMAHA
• Bought 40 acres of land.
• Went to Columbia to study under Benjamin
Graham.
• He refused to hire him.
• Came back and got married.
30. Warren Buffet- The Sage of OMAHA
• Valve investing Strategy of selecting stocks that
trade for less than their intrinsic value.
• BUFFET went a step beyond value investing.
• Launched buffet associates.
• In 1962 he joined forces with Charles Munger.
31. Warren Buffet- The Sage of OMAHA
• This collaboration resulted in investment
philosophy of value investing which helped
buffet to get where he is today.
• Along his way he bought a dying textile mill.
• Buffet picks stocks in what he believes were
managed under valued companies.
32. Warren Buffet- The Sage of OMAHA
• He holds stock for infinite period of time.
• He also purchased companies outrights and
let mgt team perform their day to day
business.
33. Warren Buffet- The Sage of OMAHA
• He believed that an investor or business man
should look at the company in the same way.
• The question that businessman should ask is
WHAT IS THE CASH GENERATING POTENTIAL
OF THE COMPANY.
34. THREE MAJOR CATAGORIES OF
INVESTMENT
• In 2011 in his letter to shareholders, Chairman
Warren Buffet puts investments into 3 major
categories.
• CURRENCY BASED INVESTMENT
• SPECULATIVE INVESTMENT
• PRODUCTIVE INVESTMENT
35. CURRENCY BASES INVESTMENT
• Deals with the bonds and bank deposits
• Warren buffet said ‘ IN TRUTH THEY ARE
AMONG THE MOST DANGEROUS ASSETS’.
36. SPECULATIVE INVESTMENT
• Are the assets that one buys with the hope of
selling them to someone else with high price.
• Physical gold is example.
• Stock prices at certain companies are easily
inflated with speculative buyer. The investors
are prone to loose a lot of money.
37. Productive asset
• This is buffet most favourite kind of
investment.
• Used to produce goods in any business.
• Buffet prefers productive assets eg farmland,
company, real estate.
39. CONTENTS
O Buffett's Philosophy
O investment philosophy
O consumer monopolies
O Buffett's Methodology
O Buffet’s Tenets
O Income Investing
O Some piece of advices
40. Buffett's Philosophy
O He chooses stocks solely based on their
overall potential as a company - he looks at
each as a whole.
O Holding these stocks as a long-term play,
Buffett seeks not capital gain but ownership in
quality companies extremely capable of
generating earnings.
O When Buffett invests in a company, he isn't
concerned with whether the market will
eventually recognize its worth; he is
concerned with how well that company can
make money as a business.
41. Warren Buffet –his investment
philosophy
O Buffett seeks businesses whose product
or service will be in constant and
growing demand. In his view,
businesses can be divided into basic
types:
• Consumer monopolies, selling products
where there is no effective competitor,
either due to a patent or brand name or
similar intangible that makes the product or
service unique.
• Buffet is interested in consumer
monopolies
42. As per Warren Buffet Types of
consumer monopolies
O there are three types of consumer
monopolies
.
1 Businesses that make products that wear out fast or are used
up quickly and have brand-name appeal that merchants must
carry to attract customers.
43. .
As perWarren Buffet – thereare three
typesof consumer monopolies
2 Businesses that provide repetitive consumer services that
people and businesses are in constant need of.
44. .
As perWarren Buffet – thereare three
typesof consumer monopolies
• Communications firms that provide a repetitive service that
manufacturers must use to persuade the public to buy the
manufacturer's products. Advertising agencies, magazine
publishers, newspapers, and telecommunications networks
are good examples
45. Buffett's Methodology
O Here we look at how Buffett finds low-
priced value by asking himself some
questions when he evaluates the
relationship between a stock's level of
excellence and its price. Keep in mind that
these are not the only things he analyzes
but rather a brief summary of what Buffett
looks for:
46. Buffett's Methodology
O 1. Has the company consistently
performed well?
O 2. Has the company avoided excess debt?
O 3. Are profit margins high? Are they
increasing?
O 4. How long has the company been
public?
O 5. Do the company's products rely on a
commodity?
O 6. Is the stock selling at a 25% discount to
its real value?
47. 1. Has the company
consistently performed well?
O Sometimes return on equity (ROE) is referred to as
"stockholder's return on investment." It reveals the
rate at which shareholders are earning income on
their shares.
O Buffett always looks at ROE to see whether a
company has consistently performed well compared
to other companies in the same industry
O . ROE is calculated as follows:
= Net Income / Shareholder's Equity
• Looking at the ROE in just the last year isn't
enough. The investor should view the ROE from
the past five to 10 years to gauge historical
performance.
48. 2. Has the company avoided
excess debt?
O The debt/equity ratio is another key
characteristic Buffett considers carefully.
O Buffett prefers to see a small amount of debt
so that earnings growth is being generated
from shareholders' equity as opposed to
borrowed money.
O The debt/equity ratio is calculated as follows:
= Total Liabilities / Shareholders' Equity
O This ratio shows the proportion of equity and
debt the company is using to finance its
assets; and the higher the ratio, the more debt
- rather than equity - is financing the company
49. debt/equity ratio
O A high debt level compared to equity can
result in volatile earnings and large
interest expenses.investors sometimes
use only long-term debtinstead of total
liabilities in the calculation above
50. 3. Are profit margins high? Are
they increasing?
O A company's profitability depends not only on
having a good profit margin but also on
consistently increasing it
O This margin is calculated by dividing net
income by net sales
O For a good indication of historical profit
margins, investors should look back at least
five years
O high profit margin indicates the company is
executing its business well, but increasing
margins means management has been
extremely efficient and successful at
controlling expenses
51. 4. How long has the company
been public?
O Buffett typically considers only companies that have
been around for at least 10 years
O It makes sense that one of Buffet's criteria is
longevity: value investing means looking at
companies that have stood the test of time but are
currently undervalued
O Never underestimate the value of historical
performance, which demonstrates the company's
ability (or inability) to increase shareholder value
O Do keep in mind, however, that a stock's past
performance does not guarantee future performance
- the value investor's job is to determine how well the
company can perform as it did in the past
O . Determining this is inherently tricky, but evidently
Buffett is very good at it
52. 5. Do the company's products
rely on a commodity
O Initially you might think of this question as
a radical approach to narrowing down a
company.
O Buffett, however, sees this question as an
important one
O . He tends to shy away (but not always)
from companies whose products are
indistinguishable from those of
competitors, and those that rely solely
on a commodity such as oil and gas
53. Buffett calls a company's economic
moat, or competitive advantage.
O If the company does not offer anything
different than another firm within the same
industry, Buffett sees little that sets the
company apart. Any characteristic that is
hard to replicate is what Buffett calls a
company's economic moat, or competitive
advantage.
O The wider the moat, the tougher it is for a
competitor to gain market share
54. 6. Is the stock selling at a 25%
discount to its real value?
O it's Buffett's most important skill.
O To check this, an investor must determine a
company's intrinsic value by analyzing a
number of business fundamentals including
earnings, revenues and assets
O a company's intrinsic value is usually higher
(and more complicated) than
its liquidation value - what a company would
be worth if it were broken up and sold today
O The liquidation value doesn't
include intangibles such as the value of a
brand name, which is no
56. Investment Tenets
O Business Tenets
O Is the business simple and understandable?
O Does the business have a consistent operating
history?
O Does the business have favorable long-term
prospects?
O Management Tenets
O Is management rational?
O Is management candid with the shareholders?
O Does management resist the institutional
imperative?
57. Investment Tenets
O Financial Tenets
O Focus on ROE, not EPS
O Calculate owner earnings to get a true
reflection of value
O Look for companies with high profit margins
O For every dollar retained, make sure the
company has created at least one dollar of
market value.
O Market Tenets
O What is the value of the business?
O Can the business be purchased at a significant
discount to its value?
58. Buffett’s Four Steps to
Investing
1. Turn off the stock market.
2. Don’t worry about the economy.
3. Buy a business, not a stock.
Change your perspective to that of a
business owner and learn as much as
possible about the business and industry.
4. Manage a portfolio of businesses.
Don’t diversify for diversification’s
sake.
59. Buffet’s Yearly Check-up:
O - Calculate return on beginning
shareholder’s equity
O - Check the changes in operating margins,
debt levels, and capital expenditures.
O - Check the company’s cash generating
ability
61. Income Investing
O Buying stocks primarily for the stream of
dividends they can generate
O Typically found in mature slow-growth
industries (Utilities, Real Estate
Investment Trust)
O Desire companies with strong stability
O Note: Dividends may be offset by changes
in stock price
62. Income Investing
Dividend Yield
O Annual Dividends / Share Price
O measure how much cash flow getting for each dollar
invested
O Example. Two companies pay annual dividends of $1
/ share
ABC company's stock is trading at $20 while
XYZ company's stock is trading at $40.
Then ABC has a dividend yield of 5% while
XYZ is only yielding 2.5%.
63. Warren Buffet –The sage of
Omaha
• He believes that an investor and a
businessperson should look at a company in the
same way. The businessperson wants to buy the
entire company while an investor wants a part
• The first question any businessperson will ask is,
‘‘What is the cash generating potential of this
company?’’
• Over time, there will always be a direct correlation
between the value of a company and its cash
generating capacity. The investor would benefit by
using the same business purchase criteria as the
businessperson
64. Warren Buffet –The sage of
Omaha
O Buffet picks up stocks in what he believes
are well managed under valued
companies
O When he purchases any stock – his
intention is to hold the stocks for infinite
period of time
O Coke, Amex, Gillette etc are such stocks
held by him for many decades
O He also purchases companies outright
and let’s their management teams handle
their day to day business
66. His Advice to people……….
Money doesn't create man but it is the
man who created money.
Live your life as simple as you are.
Don't do what others say, just listen to them, but
do what you feel is good.
Don't go on brand name; just wear those things
in which u feel comfortable.
Don't waste your money on unnecessary things;
just spend on them who are really in need rather.
After all it's your life then why give chance to
others to rule our life."
67. O Encourage your children to invest.
O Encourage your children to start some kind of
business .
O Don't buy more than what you "really need"
and encourage your children to do and think
the same.
O Stay away from credit cards (bank loans).
O You are what you are.
O Assign the right people to the right jobs
68. He has given his CEO's only 2 rules.
1: Do not lose any of your share
holder's money.
2: Do not forget rule number 1.
70. HIGHLIGHTS OF WARREN BUFFET’S
LECTURE
Introduction
Keys to Investment Success
Require a Statement Before Being
Allowed to Buy a Stock
Tests of a Good Business
Agony vs. Ecstasy Businesses
71. Highlights of warren baffet’s lectures
• Introduction
after becoming the richest person in world
many of universities invited him to deliver
lecture to their business community.
Florida university , Columbia university, Akron
university, Kansas university business school and
Notre Dam university.
72. Key to investment success
Temperament….
The most important quality is not how much IQ
you have got.
IQ is not a scarce factor in business.
Need of reasonable amount of intelligence, but
temperamaent is 90% of it.
73. Require a statement before being
allowed to buy a stock
• Never buy a stock, considering the factors of
business
• Make a peace of paper
74. Tests of a good business
• Great business
you are looking a marvelous business when you
look in mirror and say mirror, mirror on the wall,
how much should I charge on this product in this
fall. And mirror replies ‘’ more’’.
This will a great busuness.
75. Day and night business
• If u are doing textile business and raise only
one cent on one yard .
• Some people pay and some not pay that will a
night and day business.
76. Good business
• If u go into a drugstore and ay ‘’ I’d like a Hershay
bar chocolate. And the man says I don’t have any
hershay bar , but I’ve this unmarked chocolate
bar, and this is a nickel cheaper than hershay bar
chocolate . You just go out the store and go in
another store and buy hershay bar.
• This is a good business.
• The ability to raise price- the ability to
differentiate yourself in a real way,and a real way
means you can charge a different price.
77. Keys to avoiding trouble and leading a
happy life
• You really don’t need leverage in this world .
• Keys.
• Never borrow a significant amount of money
for business
• Never took interest
• Always happy with present money
•example
79. CASE STUDY
There are 14 QUESTIONS that we need to
answer
We will take one corporate example –Asian
Paints and analyze the stock to find out
Whether is it worth at all? And if yes
At what price one must buy the Asian Paints
stock
80. AN OVERVIEW
Type Public
Traded as BSE: 500820
NSE: ASIANPAINT
Industry Chemicals
Founded 1942
Headquarters Mumbai, India
Area served Global
Key people K.B.S. Anand (MD & CEO)
Products Paints and speciality products
Revenue US$1.6 billion(2012)
Profit US$160 million(2012)
Employees 4,937 (2012)
Website www.asianpaints.com
81. AN OVERVIEW
The company recorded revenues of
approximately $1,708.1 million in the fiscal
year ended March 2011. An increase of 14.2%
over 2010.
The company's operating profit was
approximately $306.1 million in fiscal 2011, an
increase of 2% over 2010.
Its net profit was approximately $184.9
million in fiscal 2011, an increase of 0.9% over
2010.
88. Q 1
Is it a consumer monopoly or commodity
business –does it have an identifiable durable
competitive advantage?
Consumer monopolies typically have high profit margins
because of their unique niche
Beyond high profit margins, look for companies with
operating margins and net profit margins above their industry
norms
Also look for strong earnings and high return on equity (ROE)
will also help to identify consumer monopolies
Look at a detailed study of the firm's position in the industry
and how it might change over time
89. Q1 (cont’d)
Operating profit Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
Asian Paints 15.03% 15.98% 17.18% 12.18% 14.24% 12.31% 13.20% 13.05%
Berger Paints 9.50% 9.41% 7.35% 7.38% 8.66% 8.77% 9.18% 8.58%
Net Profit Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
Asian Paints 9.93% 10.69% 12.27% 7.30% 9.15% 7.18% 6.91% 6.82%
Berger Paints 5.64% 5.94% 6.08% 4.58% 5.87% 6.34% 6.38% 5.60%
RONW Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
Asian Paints 31.68% 34.82% 43.52% 26.58% 32.99% 25.18% 22.21% 21.26%
Berger Paints 22.78% 21.77% 20.18% 21.26% 25.67% 30.36% 31.20% 26.28%
90. Q1 (cont’d)
Is it a consumer monopoly or commodity business
–does it have an identifiable durable competitive
advantage?
Consumer monopolies typically have high profit margins
because of their unique niche
Beyond high profit margins, look for companies with operating
margins and net profit margins above their industry norms
Also look for strong earnings and high return on equity will
also help to identify consumer monopolies
Look at a detailed study of the firm's position in the industry
and how it might change over time.
YES - Asian Paints has an identifiable durable competitive
advantage in the form of it’s brand leadership and it’s
distribution network in India
91. Q2
Do you understand how the product /service/business
model works?
Only invest in industries that you understand – for
example Buffet refused to invest in ecommerce
companies during the dot com boom because he did
not understand their business
YES - Asian Paints – the company buys or makes raw
materials, manufactures the paints, distributes it
through it’s network and sells it to B2C and B2B
customers – profitability comes from efficient
operations, volumes and ability to get a premium due
to brand positioning
92. Q3
What is the chance that the product /service/business
model would be obsolete in the next 20 years?
Will there be a market for this product 20 years from
now
If there is going to be technological changes predicted,
then will this company have an upper hand still?
YES - Asian paints – The paint product may evolve
technically – but paints as a category will survive and
Asian paints is expected to have an upper hand due to
it’s size and reach.
93. Q4
Does the company allocate capital exclusively
in the realm of expertise?
Where have been their investments in the
past 5-10 years?
Does the company stick with what it knows?
YES - Asian Paints has not invested in
unrelated diversification in the past 10 years
94. Q5
What has been the company’s EPS history and
growth rate
The company must show a consistent growth in
EPS over the past 10 years
Erratic growth and dips in EPS would mostly
make the company unattractive for investment
unless there is a clear enough reason visible as to
why it happened.
YES - Asian Paints has a consistent EPS growth in
the past decade and has a EPS CAGR of 26.1%
95. Q6
Is the company consistently earning high
Return on equity
The company must show a consistently high
ROE over the past 10 years
ROE = reported net profit /Net worth
YES – Asian paints has an ROE ranging from
27.16% to 51.69% with an average ROE of
37.0%
96. Q7
Is the company consistently earning high Return
on total capital?
The company must show a consistently high
Return on total capital employed over the past 10
years
ROCE = Reported net profit /Total liabilities in BS
YES -Asian paints has a high ROCE ranging from
18.71% to 43.52% with an average ROCE of
28.76%
97. Q8
Is the company conservatively financed?
Consumer monopolies tend to have strong cash
flows, with little need for long-term debt
Screen for companies with no debt or low debt –
look at the interest coverage ratio –compare with
industry peers
YES -Asian paints has a debt ranging from Rs.
169 crores to Rs.336 crores and a net profit
ranging from Rs. 143 crores to Rs. 1159 crores –
the company is conservatively financed
98. Q9
Has the company been buying back its shares?
Buffett prefers that firms reinvest their earnings
within the company, provided that profitable
opportunities exist. When companies have excess
cash flow, Buffett favours shareholder- enhancing
manoeuvres such as share buybacks
This answer if Yes is good - but a NO answer
does not disqualify the stock.
NO –Asian paints has not bought back any shares
in the past 10 years
99. Q10
Is the company free to adjust prices during
inflation?
True consumer monopolies are able to adjust
prices during inflation without the risk of
losing significant unit sales.
Mar '13 Mar '12 Mar '11Mar '10Mar '09Mar '08Mar '07Mar '06Mar '05Mar '04
Total Income 11,736.56 10,277.18 8,246.96 7,206.23 5,749.05 4,679.72 3,948.81 3,051.92 2,655.86 2,234.49
Reported Net Profit 1159.52 1020.58 881.35 883.91 419.48 428.05 283.49 210.75 181.04 143.81
Profitability 9.88% 9.93% 10.69% 12.27% 7.30% 9.15% 7.18% 6.91% 6.82% 6.44%
100. Q10 (cont’d)
Is the company free to adjust prices to
inflation?
True consumer monopolies are able to adjust
prices to inflation without the risk of losing
significant unit sales.
YES – Profitability ratio of Asian paints is
consistently around 8.65% over the past 10
years – that means that inflation does not
impact the profits of Asian Paints
101. Q11
Does company need to constantly reinvest in
capital?
Retained earnings must first go toward
maintaining current operations at competitive
levels, so the lower the amount needed to
maintain current operations, the better.
NOT REALLY – Asian Paints does not have a large
capex for investment in plant and machinery –
the main investments are in branding and the
SG&A as a % of Net sales is around 18% for the
past decade – this is around what any FMCG
company would spend
102. Q12
What is the relative value to a Govt bond?
EPS for the year divided by the long-term government
bond interest rate. The resulting figure is the relative
value - the price that would result in an initial return
equal to the return paid on government bonds.
We then have to look at the CAGR of the EPS as well.
Asian Paints – assuming a 8% govt. bond rate – and
based on the current EPS of 120.88 – the relative value
of govt. bond would be –Rs 1511
With the current share price of Rs. 4553 – the Asian
Paints share gives a pretax return of 2.65% with the
returns growing at 26.1% p.a.
103. Q13
What is the projected share value and return on
investment using historical earnings growth rate:
Calculate the EPS for the next 10 years as follows:
EPS (Year 2) = EPS (Year 1) * CAGR of EPS
Calculate the dividend payout for the next 10 years as
follows:
Dividend payout (Year 2) =EPS (Year 2) * Avg. DP ratio
Calculate the sum of all the dividends paid for the
next 10 years
104. Q13(cont’d)
What is the projected share value and return on
investment using historical earnings growth rate:
Calculate the CAGR of EPS for the past 10 years
Calculate the average dividend payout ratio
(DPS/EPS) for the past 10 years
Calculate the average PE for the last 10 years
For Asian Paints we have
CAGR of EPS is 26.10%
Average Dividend payout ratio is 42.58%
Average PE for the last 10 years has been – 23.49
106. Q13 (cont’d)
What is the projected share value and return on
investment using historical earnings growth
rate:
Projected share price at 10th year =
EPS at 10th year * Average PE ratio
Total estimated gain at the end of 10th year =
Projected share price at 10th year + Sum of all
dividends for 10 years
Calculate the CAGR of your investment in 10
years – FOR ASIAN PAINTS THIS IS 23.82%
107. Historical Earnings Growth Rate Method
Year Ending EPS DPS EPS after 10 years 1229.24
2013 120.88 46 Sum of Dividend for 10 years 2279.99
2014 152.43 64.91 Average PE of the stock (last 10 yrs) 23.49
2015 192.23 81.85
2016 242.40 103.22 Projected share price in 2023 28874.47
2017 305.68 130.17 Total gain including dividends 31154.47
2018 385.47 164.14
2019 486.10 206.99 Current share price 4553
2020 612.99 261.02 CAGR of investment 23.82%
2021 773.00 329.16
2022 974.78 415.08 Target share price (20% CAGR) 6037.94
2023 1229.24 523.44
Total 2279.99
108. Q14
What is the projected share value and return
on investment using sustainable growth rate:
Calculate the average PE ratio for the past 10
years -23.49
Calculate the average ROE for the past 10
years -37%
Calculate the average dividend payout ratio
for the past 10 years – 42.58%
109. Q14 (cont’d)
What is the projected share value and return on
investment using sustainable growth rate:
Calculate the Book value of the share for the next 10
years using the formula:
BV (Year 2)= BV (Year 0) + Retained earnings (Year1)
Retained earnings (Year1)
= Projected EPS (Year1)– Projected Dividend Payout
(Year1)
Projected EPS (Year 1) = Avg. ROE * BV (Year 0)
Projected dividend payout (Year1)
= EPS (Year1)* Average DP ratio for past 10 yrs
111. Q14 (cont’d)
What is the projected share value and return on
investment using sustainable growth rate:
Calculate the EPS for Year 10 – Rs. 895.7
Calculate the expected Share Price for Year 10
= EPS (FY10)* Average PE = Rs. 21040
To this share price estimate, add the estimated
dividends paid for the next 10 years = Rs 22900
Calculate the expected CAGR of your
investment today – 19.66%
112. SUSTAINABLE GROWTH RATE MODEL
Year BVPS EPS DPS
Retained
Earnings
2013 352.8 120.9 46.0 74.9 EPS in 2023 895.72
2014 427.7 158.2 67.4 90.9 Average PE 23.489
2015 518.6 191.8 81.7 110.2 Share price in 2023 21040.23
2016 628.7 232.6 99.0 133.6
2017 762.3 282.0 120.1 161.9
Total gain including
dividends
22900.04
2018 924.2 341.9 145.6 196.3 Current share price 4553
2019 1,120.5 414.5 176.5 238.0
2020 1,358.5 502.6 214.0 288.6 CAGR of investment 19.66%
2021 1,647.1 609.3 259.5 349.9
2022 1,997.0 738.8 314.6 424.2
Target Share Price
(20% CAGR)
4438
2023 2,421.2 895.7 381.4 514.3
Total 1859.81
113. At What Price Should One Buy Asian
Paints Stocks
Based on Historical earnings method:
Total gain in 10 years – Rs 31554
Based on sustainable earnings method:
Total gain in 10 years – Rs 22900
Taking the conservative of the two estimates – we
will take the sustainable earnings method in this
case.
FOR A 20% CAGR, THE CURRENT PRICE
FOR BUYING NEEDS TO BE RS. 4438
114. CONCLUSION
As you have probably noticed, Buffett's investing
style reflects a practical, down-to-earth attitude.
Buffett maintains this attitude in other areas of his
life.
He doesn't live in a huge house, he doesn't collect
cars and he doesn't take a limousine to work. The
value-investing style is not without its critics, but
whether you support Buffett or not, the proof is in
the pudding.
He is one of the richest people in the world, with
a net worth of more than $53 billion (Forbes 2013).
115. CONCLUSION
His investment strategy is long term and
selective, incorporating a stringent set of
requirements prior to an investment decision
being made.
Buffett also benefits from a huge cash "war
chest" that can be used to buy millions of
shares at a time, providing an ever-ready
opportunity to earn huge returns.
